Borrowers could soon be required to pay back their federal student loans directly from their paychecks, if one powerful Republican gets his way.

Senator Lamar Alexander, a Republican from Tennessee and the chair of the Senate’s Committee on Health, Education Labor and Pensions, which oversees higher education, proposed automatically withholding a borrower’s monthly student-loan payment from their paycheck, similar to the system already used for federal payroll taxes.

Alexander floated the idea in a speech outlining his priorities for reauthorizing the Higher Education Act, the statute that governs colleges and financial aid. As a former governor of Tennessee, Secretary of Education and president of the University of Tennessee, Alexander is a prominent voice on higher education issues. He plans to retire in 2020 and has signaled that he’d like Congress to reauthorize the HEA by the end of the year.

Senator Lamar Alexander said his proposal would ‘streamline’ the nine repayment plans available to federal student-loan borrowers into ‘a new option that guarantees that borrowers would never have to pay more than 10% of their income that is not needed for necessities.’
—Senator Lamar Alexander, chair of the Senate’s Committee on Health, Education Labor and Pensions

In the speech, Alexander said his proposal would “streamline” the nine repayment plans currently available to federal student-loan borrowers into “a new option that guarantees that borrowers would never have to pay more than 10% of their income that is not needed for necessities.”

“If a borrower loses their job or does not make enough, they would not pay anything and it would not hurt their credit score,” he continued. “The monthly payment would be automatically withheld from borrowers’ paychecks, just like federal taxes.

It’s hard to say how likely it is that Alexander’s proposals will become reality. While there is bipartisan consensus on some of the challenges facing colleges and the student-loan program, experts are skeptical that the two sides could reach agreement in such a partisan environment.

Regardless, Alexander’s remarks may kickoff a serious policy discussion about a system for repaying student debt. Some hail a government-run debt repayment system as a fix to many of our country’s student-loan woes, while others deride the idea as paternalistic and punitive to people who are already struggling.

A strategy to help borrowers avoid default

Proponents of payroll withholding for student-loan payments say the idea would help borrowers stay current on their loans and avoid default, while also ensuring taxpayers received a return on their investment, given that taxes pay for the federal student-loan program. Under his proposal, a borrower could choose to repay their loan over 10 years through payroll withholding or could have 10% of their discretionary income withheld to repay their debt.

‘This new option should end the nightmare that many students have of never being able to afford their student-loan payments.’

Some amount of money for necessities would be protected from the withholding, according to Alexander’s remarks. The logic goes that even when borrowers fall on hard times, they would be able to stay current on their debt and avoid default, which can come with punishing consequences.

Federal student-loan borrowers already have the option to repay their loans as a percentage of their income, but the slew of repayment plans and, in some cases, confusing counseling from student-loan companies, can make it difficult for borrowers to actually access those options. Payroll withholding would eliminate that friction, proponents say.

“This new option should end the nightmare that many students have of never being able to afford their student-loan payments,” Alexander told the crowd Monday at the American Enterprise Institute, a right-leaning think tank, according to his prepared remarks.

Paycheck deductions could backfire

But consumer advocates view the proposal differently. Perhaps their biggest concern: It eliminates choice for borrowers in how they handle their own finances.

“It’s a bad idea,” said Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. “The bottom line is it would force borrowers to prioritize their student loan payments above any other kind of expense they have.”

‘It would force borrowers to prioritize their student loan payments above any other kind of expense they have.’
—Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center

Even with vows to protect some income from student loan payments for necessities, borrowers could still wind up struggling, Yu said. For one, they could experience a financial emergency, like a medical expense, or their income may be “lumpy” — meaning they need to save any extra money in prosperous times for leaner parts of the year.

In addition, the current formula for determining discretionary income for the purposes of income-driven repayment programs doesn’t take region into account. If policymakers were to repeat that approach with payroll withholding, borrowers living in expensive areas could suffer.

“A lot of the borrowers that we work with, their budgets don’t line up, they have $2,000 of expenses and $1,500 of income and at the end of the day you have to make a choice,” Yu said. “The priority has to be keeping a roof on people’s heads, putting food on the table.”

Borrowers face tough financial choices

There’s already some evidence that taking away income to repay a student loan pushes borrowers to make tough choices, Yu notes. Borrowers who are disabled complained to the Consumer Financial Protection Bureau that when their Social Security disability benefits were garnished to pay for their defaulted student loans they struggled to afford housing and medication, according to a 2017 CFPB report.

Placing the burden of calculating and withholding student-loan payments on employers could also pose challenges. Already, employers complain that their role in garnishing wages to pay back debts, including student loans, “can be detrimental to the affected employee, workplace, and employer,” according to a 2014 report from ADP, the payroll and tax services company.

Australia collects student loan payments like a tax

Despite these concerns, there are examples of a student-loan payment as tax working. A few other countries, most famously Australia, already use a version of this system. There, borrowers begin paying back their loans once they start earning at least $44,000. They pay off their loans as a percentage of their income that rises with their salary. The government collects the money through the tax system.

In Australia, borrowers begin paying back their student loans once they start earning at least $44,000.

Proponents of adopting this type of system in the U.S. note that it’s very rare for borrowers in Australia to default on their loans. But it’s hard to say how seamlessly this setup would transfer to the U.S. The Australian higher education system is different from America’s in more than just the way the country collects borrowers’ debt. There, most students attend public colleges whose price maximums are set by the government.

What looks good on paper may not solve the problem

As part of his speech, Alexander did propose a bigger role for the federal government in curbing college costs. He floated the idea that colleges be held accountable for whether students in individual programs are actually re-paying their debts. Alexander argued that would incentivize colleges to keep tuition low and jettison programs that aren’t paying off for borrowers.

But advocates also warn that a student loan collection system that perhaps works in other countries may be particularly punitive to borrowers in the U.S., where the social safety net is much thinner. For example, in some countries that withhold student loan payments, healthcare is more affordable.

‘While forcing people to make their student loan payment above all of the other financial challenges they have in their life might make the student debt crisis look a little better on paper, it does nothing to solve the larger problem.’
—Seth Frotman, former student loan ombudsman at the CFPB.

“There are substantial differences that give me real pause about whether we should just adopt a system without recognizing all of the ways in which student loan borrowers struggle in their financial lives and we do very little to help them,” said Seth Frotman, the former student loan ombdusman at the CFPB and the executive director of the Student Borrower Protection Center, an advocacy group.

For Frotman, withholding student loan payments from a borrower’s paycheck adds to a dangerous precedent of treating student debt differently from other forms of credit — preventing borrowers from discharging it in bankruptcy, garnishing wages or Social Security benefits over a defaulted loan etc. — that often leaves borrowers worse off.

“While forcing people to make their student-loan payment above all of the other financial challenges they have in their life might make the student-debt crisis look a little better on paper, it does nothing to solve the larger problem,” he said.

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Jillian
Berman

Jillian Berman covers student debt and millennial finance. You can follow her on Twitter @JillianBerman.

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